Despite the rise in price of Bitcoin, I urge caution against you trying to get rich quick, plus what you need to do before buying any crypto.
Wow is Bitcoin trending in the news.
First it was Bitcoin’s meteoric rise in price, nearly tripling in 2020.
Then you add in resident celebrity crazy person Elon Musk’s buying $1.5 billion of Bitcoin, causing as much stir as its representative price movement.
And of course, the tittering smugness of every person who’s been telling you for years that Bitcoin is future, and who are now talking about how many millions of dollars in Bitcoin that they hodl.*
In many ways, this feels like deja vu. It was only a few years ago, that the universe was all agog at this new form of digital money. And now, here we are again.
So I ask, has anything changed?
* Not a typo, it’s a thing.
Table of Contents
Recap
I last wrote about Bitcoin in 2017.
I encourage you to read that post because it goes into a lot of details about the background of blockchain and cryptocurrency, beyond merely Bitcoin.
But you can take my quick capsule review right here:
“My feelings about buying Bitcoin are similar to gold: it’s fine as “play money”. An expense. If you have that money to burn. But you have to have your plan in order first. Otherwise, you’ll take away precious momentum to building wealth.”
What’s happened since then
That post was published on June 22, 2017, 3 years and 8 months ago.
So let’s check in on the price of Bitcoin from that day to now:
Holy moonshot, Batman! From $2,763 to $46,341, a growth of 1680%, or about 220% growth per year.
So if you had bought $1,000 of Bitcoin on the day that I published that post, you’d have $16,800 today. Not bad at all.
But here’s the thing: You didn’t buy Bitcoin on that day. Well, most likely not. And now that Bitcoin is trading in the mid-five figures, you may well ask yourself if you should get in now or if the boom has already passed you by.
The wrong question
That is the wrong question.
It’s all but impossible to think about Bitcoin without our most greediest impulses to come to the fore. “Just think of all the money I could earn, and quickly too!“
That alone is a source of concern. You’re probably not buying Bitcoin because of your interest in the decentralized possibilities of the blockchain. You’re interested because you want to get rich quickly.
Am I right?
Bitcoin offers the tantalizing possibility of much higher returns than what you would get anywhere else, including in the broader stock market, or even in real estate.
And that’s pretty compelling. I believe that anyone can get wealthy given enough time and consistent effort, but why do that when you can make 220% a year?
Here’s the problem
I don’t believe that Bitcoin’s returns are sustainable. I believe that there are going to be wild price swings, and that you’re more likely going to lose your shirt on Bitcoin, unless you can hold on for a much longer time scale, like 5 to 10 years.
But let’s say I’m wrong, and you invest a truckload of money today, and in 3 years it’s up 1,680% again.
How will you know when to sell?
You’ll never be able to predict the peak. And with such voluminous growth, if you’re on that train, why would get off it? If you sold before the peak, even a little bit, wouldn’t you kick yourself even harder?
No, you’re likely to hold on for dear life and miss the peak.
The whole point of unrestricted returns gets in the way of reasoned analysis. Who is going to take a yearly cut of their Bitcoin such that they can live a modest and sustainable life? Why do that when this thing is going to the moon?
The more likely scenario is that you invest money at the peak, or near it, and you don’t make a big return, and possibly make a loss. Remember, you mostly hear about the winners, and not about the people who mortgaged their house to by Bitcoin right before the crash.
What to do now
Does all this mean that you should avoid Bitcoin?
Surprisingly, I say no. There’s no need to avoid Bitcoin. If you want to buy in, I say go for it…
…on a few conditions.
Here are my prerequisites for buying Bitcoin:
- You need to not have any debt. Any money that you have that could go to Bitcoin should first be used to pay off debt. A guaranteed return on investment beats a potential return on investment any day.
- You need to have a fully funded emergency fund. I’d say six months at the least at this point, given the uncertain state of the economy. Figure out how much you spend in a given month and multiply that by 6. Put that away in a savings account.
- You need to be putting some money away from retirement. I recommend 15% of your income, but anything in the ballpark is fine. (And no, Bitcoin doesn’t count as saving for retirement.)
You need to remember that Bitcoin isn’t an investment; it is speculation, no different from buying penny stocks or playing the roulette wheel. Yes, you think the odds are in your favor, but you don’t know.
(No, really, you don’t know.)
And so, in order to be safe, smart, and sophisticated about Bitcoin, you need to remember this mantra: “Only use money that you are prepared to lose.“
Full disclosure
I don’t own Bitcoin. I do own some other cryptocurrencies, but they are a rounding error in my net worth. And lest you think that I’m bearish on Bitcoin relative to other crypto currencies I own (which I’m not mentioning because it’s not relevant), I assure you that I’d say the same things about those. It’s all a game, so don’t bet your life on the roll of a dice, no matter how weighted in your favor you believe it is.
